Global Financial Shocks and Foreign Asset Repatriation: Do Local Investors Play a Stabilizing Role?

By Gustavo Adler, Marie-Louise Djigbenou, Sebastian Sosa

April 16, 2014

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Gustavo Adler, Marie-Louise Djigbenou, and Sebastian Sosa. Global Financial Shocks and Foreign Asset Repatriation: Do Local Investors Play a Stabilizing Role?, (USA: International Monetary Fund, 2014) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We study the dynamic response of gross capital flows in emerging market economies to different global financial shocks, using a panel vector-autoregressive (PVAR) setting. Our focus lies primarily on the potentially stabilizing role played by domestic investors in offsetting the response of foreign investors to global shocks. We find evidence of such role, but its existence and magnitude depend on the nature of the shock. Local investors play a meaningful stabilizing role in the face of global uncertainty shocks, as well as shocks to long-term U.S. interest rates. However, while in the former case, sizeable asset repatriation largely offsets the retrenchment of non-residents, in the latter case the extent of the offsetting is much more limited. Meanwhile, residents and non-resident behave alike in response to short-term U.S. interest rate shocks, pulling capital away from emerging markets, although magnitudes are not economically significant. The results shed light on the potential impact of the Fed’s QE tapering on emerging market economies.

Subject: Balance of payments, Capital flows, Capital inflows, External position, Financial services, Foreign assets, Long term interest rates, Short term interest rates

Keywords: Asia and Pacific, Asset, Asset repatriation, Capital flows, Capital inflows, EME's exposure, EMES' vulnerability, Europe, Foreign assets, Global, Global financial shocks, Gross capital flows, Interest rate, Interest rate shock, Investor, Long term interest rates, Net capital, Net capital capital inflow, Short term interest rates, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/060
Stock No:

WPIEA2014060
ISBN:

9781484353349
ISSN:

1018-5941

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